Global Equity Indexes:

As described earlier in this chapter, there are several stock market indexes available which depict the performance of particular sectors and a country as a whole. However, the problem arises when the performance of one country index is compared with that of another, since the composition of securities, sectors, and selection and calculation methodologies are most times different in each country. To overcome this problem of comparison, several groups of global non-banking financial institutions, index service providers and international exchanges have formed major regional and global indices which track the performance of concerned region or global equity market as a whole. The three most commonly used global indices are: the Morgan Stanley Capital International (MSCI) World Index, the Financial Times Stock Exchange (FTSE) All World Index, and the Dow Jones Global Index (DJGI).

Construction Methodology

All three indices' constituent weights are determined by market capitalization, i.e., market price multiplied by shares outstanding, with an adjustment for the proportion of shares which are not freely available to the investors. Country inclusion criteria are all similarly based on the size of the equity market, the freedom of capital movement, and the ability to repatriate dividends. As a result, the countries included in each index are the same, for the most part, although there are a few notable differences.

MSCI Index

The MSCI World Index is a free float adjusted market capitalization index designed to represent the performance of global equity in the developed markets. It is a widely used index to measure the performance of global equity Mutual Funds and individual portfolios. The index is unmanaged and cannot be purchased directly by the investors. The MSCI World Index aims for 85% of free float adjusted market representation in each industry group of a country. The companies included in the indices are intended to replicate the industry composition for each market. The chosen list of stocks is composed of a representative sampling of large, medium, and small-cap companies from each local market, with liquidity being an important factor in the selection of index constituents. Stocks of non-domiciled companies and investment funds are excluded from the individual country indices. The goal of the MSCI's methodology is to create a benchmark which is highly replicable and investable, and provides a broad and fair market representation. At the end of March 2007, over 1,500 stocks from across 23 world markets were included in the MSCI World Index and the MSCI World Emerging Index (25 countries) contained a further 704 stocks.